The price normalization problem in imperfect competition and the objective of the firm

Dierker, Egbert and Grodal, Birgit (1999) The price normalization problem in imperfect competition and the objective of the firm. Economic Theory, 14 (2), pp. 257-284.

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Abstract or Table of Contents

General equilibrium models of oligopolistic competition give rise to relative prices only without determining the price level. It is well known that the choice of a numéraire or, more generally, of a normalization rule converting relative prices into absolute prices entails drastic consequences for the resulting set of Nash equilibria when firms are assumed to maximize profits. This is due to the fact that changing the price normalization amounts to altering the objective functions of the firms. Clearly, the objective of a firm must not be based on price normalization rules void of any economic content. In this paper we propose a definition of the objective of a firm, called maximization of shareholders' real wealth, which takes shareholders' demand explicitly into account. This objective depends on relative prices only. Real wealth maxima are shown to exist under certain conditions. Moreover, we consider an oligopolistic market and prove the existence of a Nash equilibrium in which each firm maximizes the real wealth of its shareholders. (authors' abstract)

Item Type: Article in Academic Journal
Classification Codes (e.g. JEL): D21, D42, D43, L13, L21
Status: Published
Date Deposited: 28 Jan 2015 08:11
Last Modified: 01 Apr 2016 14:16
Identification Number or DOI: 10.1007/s001990050293
ISSN: 0938-2259

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